MBS MID-DAY: Battling Back After Morning Losses

MBS Pricing Snapshot

After some quick and fairly steep snowball selling this morning, bond markets have their feet underneath them to some small extent. MBS and Treasuries are still decidedly weaker on the day, but not as weak as they were.

Fannie 4.0s are down 7 ticks (vs 14 earlier) to 102-27 and 10's are up just over 4bps (vs 7 earlier) to 2.9291. These levels are right in line with long term pivots, and the real risk is that 10's will treat this as a floor of resistance for the rest of the day. The period following the 7yr auction at 1pm is the only time we can really know how that's shaping up.

- Business Conditions Index 7.0 vs 10.0 forecast
- New Orders 15.4 vs 11.8 previously
- Prices Paid 20.1 vs 29.9 previously
- Employment 2.2 vs 1.1 previously
- 6-month spending outlook 7.0 vs 17.2 previously

Market Reaction: Possibly somewhat helpful inasmuch as it's not a strong number that suggests further selling. New Orders were up though, so the data is more 'mixed' despite the 'weaker' headline.

Manufacturing growth in the region continued in December at a pace similar to that of November, according to firms responding to this month’s Business Outlook Survey. The survey’s broadest indicators for general activity, new orders, shipments, and employment were positive, signifying growth, and readings improved slightly in each category from November. The survey's indicators of future activity moderated slightly but continue to suggest general optimism about growth over the next six months.

- Existing Home Sales 4.9mln Annual Rate vs 5.03 Forecast
- Median prices down to 196.3k from downwardly revised 197.5k in October

- Markets Reaction: Almost undetectable improvement in bond markets. Really nothing to write home about yet.

Existing-home sales fell in November, although median prices continue to show strong year-over-year growth, according to the National Association of Realtors®.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 4.3 percent to a seasonally adjusted annual rate of 4.90 million in November from 5.12 million in October, and are 1.2 percent below the 4.96 million-unit pace in November 2012. This is the first time in 29 months that sales were below year-ago levels.

Lawrence Yun, NAR chief economist, said the market is being squeezed. “Home sales are hurt by higher mortgage interest rates, constrained inventory and continuing tight credit,” he said. “There is a pent-up demand for both rental and owner-occupied housing as household formation will inevitably burst out, but the bottleneck is in limited housing supply, due to the slow recovery in new home construction. As such, rents are rising at the fastest pace in five years, while annual home prices are rising at the highest rate in eight years.”

Treasuries were calm overnight, holding a narrow range between 2.878 and 2.90. As domestic traders started filing in for the morning, bonds began selling and 10yr yields have gradually ticked up to 2.933.

Unfortunately, there was a noticeable bounce at the inflection point near 2.92, and there's a risk this will now be treated as resistance (floor) going forward.

MBS are even worse off. Fannie 4.0s are already down another 14 ticks (almost half a point) in addition to the 14 ticks lost yesterday (102-20 at the moment).

Jobless Claims were weaker than expected, but it did nothing to help bond markets. This is snowball selling and it will either need to run its course or encounter exceptionally weak economic data at 10am. As far as "running its course" goes, that could happen any time or 10's could drift another 4bps higher, bringing MBS another .375 lower, give or take an eighth.

- Jobless Claims 379k vs 334k forecast, 369k previous
- Continued Claims 2.884m vs 2.78m forecast
- Market Reaction: Almost none, due to large seasonal distortions.

In the week ending December 14, the advance figure for seasonally adjusted initial claims was 379,000, an increase of 10,000 from the previous week's figure of 369,000. The 4-week moving average was 343,500, an increase of 13,250 from the previous week's revised average of 330,250.

The advance seasonally adjusted insured unemployment rate was 2.2 percent for the week ending December 7, an increase of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending December 7 was 2,884,000, an increase of 94,000 from the preceding week's revised level of 2,790,000. The 4-week moving average was 2,799,000, an increase of 4,250 from the preceding week's revised average of 2,794,750.